Many Are Getting Defensive

After bouncing back fairly well from some selling three times this week, the bulls just couldn't pull it off a fourth time. The dip-buyers made a very brief attempt in the first 30 minutes of trading, but once we rolled over and took out the opening lows, the dip-buyers gave it up.

The action under the surface looked much uglier than the 1% or so decline in the major indices. Breadth finished better than 4 to 1 negative, and all major sectors were in the red. Semiconductors showed some relative strength due to an upgrade of INTC, but precious metals, oils and commodities were trashed. There was no place to hide, as even the big-cap momentum favorites were sold across the board.

The blame for the weakness goes to China, which was down 5% overnight on fears that it would tighten rates to cool off its very hot economy. In addition, there is barrage of criticism of the Fed's QE2 program. No one outside of Ben Bernanke and his minions seems to believe it is going to work, and economic leaders around the world are concerned about a competition to see who can debase their currency the fastest.

There was definitely a change in the character of the action today, and the dip-buyers are now likely to be far less confident after being burned. We did hold near key support just under 1200 on the S&P 500, but this market has run almost straight up for two and a half months, so the support is precarious.

Market players have probably grown too confident that the Fed was going to keep this market from going down at all, so it is probably a positive that we have a day like this to shake out the complacency. The Fed is still out there making conditions right for the Treasury to run its printing press, and that is going to give us some support, but it is better if the bulls just don't take that for granted.